FERC Restructures California Power Market

Responding to a California power market gone haywire and teetering on the brink of operational and financial disaster, FERC Friday issued a series of remedial measures, virtually stripping the Cal-PX and Cal-ISO of their control of the market and calling market stakeholders together to negotiate bilateral forward contracts.

The Commission's main action, effective with the issuance of the order after the Friday afternoon meeting, removes the requirement that California utilities buy and sell exclusively through the California Power Exchange (Cal-PX) and clears the way for bi-lateral contracts in the forward market. FERC scheduled a settlement conference for Dec. 19 in Washington of parties in the state's power market to negotiate those contracts.

"California does [not] have the benefit of a competitive market," Chairman James Hoecker said, noting he had heard the state's power market called "crisis by design." The design was "an unworkable state law, the product of command and control that described in detail" exactly how the market should function. "It wasn't competition," Hoecker said. "It's time to get serious about saving the future of competitive markets...Competition did not fail in principle at either the wholesale or retail level because it was never well-conceived or tried. This version of competition was a disaster."

Commissioner William Massey defended the Federal Energy Regulatory Commission's backing away from price caps. "Rather than cap the spot market created by the state of California, the order would simply shrink its size and diminish its influence." This will "give back participants' ability to find the right price; This ability is what California has taken away from that market."

Massey said the action would allow bilateral transactions, support forward contracts, and allow the parties to manage risk. He urged the California Public Utilities Commission to "step up to its responsibilities" in supporting the FERC-directed activities.

Massey said the transfer of wealth in what he described as the "apocalypse" in California "is absolutely staggering. The two largest utilities are virtually bankrupt." He predicted a court, acting on accepted law and precedent, would eventually rule the utilities are entitled to recover the costs from customers, spreading the costs out over the entire state.

PG&E Corp. officials lambasted the Commission's actions, saying they left California's electric customers "exposed to price gouging and future electric supply reliability uncertainty."

"The California wholesale market is broken. And we are extremely disappointed by the insufficiency of today's FERC order," PG&E officials said in a statement. "The remedies outlined in the order do not go nearly far enough to provide a solution that ensures reliability of the state's electric supply and equally importantly, provides relief from future price gouging," the Northern California utility company said. PG&E said it was particularly disappointed that FERC did not call for retroactive price refunds for California electric customers, as was requested by Gov. Gray Davis. The utility also said it was "especially troubled" that FERC shortened the timeframe for the electric price cap from the end of 2002 to April 2001, "leaving customers exposed during the high-demand summer season."

Sen Dianne Feinstein, (D-CA), said FERC's action was unacceptable. "Rome is burning, our utilities are close to bankruptcy, Californians are facing major blackouts, and the Commission is fiddling."

Hoecker said similar competitive problems in states in the Pacific Northwest have led to pleas from governors and others for regional price caps. But he pointed to the fact that FERC is severely limited in what it can do in that region. For one, it lacks authority over the Bonneville Power Authority and other federal operations there, which make up a major portion of the market. Further, there is no Northwest spot market that can be capped in the way caps operate in California. There also would be problems with the many purchasers who already had hedged or protected themselves in some way. Hoecker strongly urged Energy Secretary Bill Richardson to convene a conference to try to identify regional problems, and offered his help in this.

Commissioners Curt Hebert and Massey said they would issue concurring opinions. Hoecker said he will submit a concurring opinion next week on items such as RTOs that are beyond the scope of the order. The Commission's actions, which went beyond recommendations it had made earlier (see Daily GPI, Nov. 2), came at an emergency meeting following a week of continuous power alerts and emergency measures to avoid rolling blackouts in the state.

The Commission's reforms call for: